Fidelity High Income Fund

Transcription

1 Fidelity High Income Fund Key Takeaways For the fiscal year ending April 30, 2018, the fund gained 4.27%, topping the 3.22% advance of its benchmark, the ICE BofAML US High Yield Constrained Index. Portfolio Manager Frederick Hoff is happy with the fund's outperformance of the benchmark the past 12 months. He partly attributes it to his willingness to take advantage of market volatility, especially in the energy sector, where he found several opportunities due to a falling oil price and lower bond valuations. Compared with the benchmark, the fund was helped most by security selection in energy, utilities, technology and capital goods. Overweighting utilities and banks & thrifts also helped. Looking at credit quality, security selection among bonds rated B and CCC/C contributed. In the lagging BB tier, the fund benefited from underweighting the category, as well as modestly helpful bond picking within it. During the period, Fred temporarily moved to an overweighting in the energy sector, based on attractive valuations, but shifted back to a modest underweighting as the price of oil rose and valuations became less attractive to him. As of April 30, Fred acknowledged higher valuations in the highyield market but continued to see opportunity in the asset class. MARKET RECAP U.S. corporate high-yield bonds gained 3.22% for the 12 months ending April 30, 2018, as measured by the ICE BofAML US High Yield Constrained Index. High-yield bonds began the period on a strong note and maintained momentum into July, rising along with other risk assets. Although heightened geopolitical risk and some industryspecific developments hampered high yield for a brief stretch in early August, the favorable environment for risk assets in the first half of the period generally prevailed overall, as the index continued on an uptrend through the end of High yield began the new year by extending its rise, but reversed course in early February and continued downward in March amid broad-based market volatility. The short-term decline was largely attributable to a policy rate hike by the U.S. Federal Reserve, a selloff in technology shares and an escalating trade dispute with China. For the full 12 months, lower-quality bonds within the index advanced 7%, topping credits rated B (+3%) and BB (+2%). By industry, gains were broad-based, with steel (+6%), chemicals (+4%) and metals/mining (+4%) boosted by the potential for increased infrastructure spending in the U.S. The index's largest component the past year, energy, rose about 5% amid higher oil prices. Notable laggards included cable/satellite TV (-1%), consumer products (0%) and telecommunications (+1%). Not FDIC Insured May Lose Value No Bank Guarantee

2 Q&A An interview with Portfolio Manager Frederick Hoff Fund Facts Trading Symbol: Frederick Hoff Portfolio Manager SPHIX Start Date: August 29, 1990 Size (in millions): $4, Investment Approach Fidelity High Income Fund is a diversified high-yield bond strategy focused on investing primarily in the bonds of non-investment-grade companies. We apply a core investment approach, with a high concentration in B-rated securities, the heart of the highyield market, where we believe research can be highly leveraged in seeking to achieve consistent risk-adjusted returns over a full credit cycle. In particular, we favor companies with strong balance sheets, improving business/industry fundamentals and strong management teams, focusing on the best values within the capital structure. In doing so, we take a longer-term investment outlook, with an eye to where we are in the credit cycle. We strive to uncover these companies through in-depth fundamental credit analysis, working in concert with Fidelity's high-income and global research teams, with the goal of identifying attractive risk/reward opportunities in the market. Q: Fred, how did the fund perform for the fiscal year ending April 30, 2018 The fund gained 4.27%, outpacing the 3.22% result of its benchmark, the ICE BofAML US High Yield Constrained Index. The fund outperformed the peer group average by a slightly wider margin. Versus the benchmark, the fund benefited from security selection in energy and utilities, as well as in technology and capital goods. Overweightings in utilities and banks & thrifts also contributed, as these industries outperformed. On a credit-quality basis, the fund benefited most from very good security selection among B-rated issues, followed by my picks in the CCC/C tier. In the lagging BB tier of the market, we benefited from underweighting this category, as well as from modestly helpful bond picking. Q: How would you assess the fund's result I'm pleased that the fund outperformed the high-yield index during a volatile market environment. Coming into the period, I was confident in the fundamental characteristics of the businesses we were investing in, and I'm happy we proved able to find companies that were successfully improving their earnings over time. To remind shareholders of the approach I follow in all types of market backdrops: I favor issuers with strong business fundamentals, well-defined business plans and the potential to improve their credit quality over time. My approach is long term in nature, normally based on an investment horizon of at least two years, as I believe this allows time for companies to generate cash flow or initiate corporate actions to improve their balance sheets. Also, my investment process generally leads me to limit the fund's exposure to the lowest-rated issues. When I do invest here, I rely heavily on the capabilities of Fidelity's high-yield credit research team, trying to find bonds that offer suitable potential reward relative to the securities' risks. Q: How did you implement this strategy in response to market conditions Applying our bottom-up (bond-by-bond) research process, I found various opportunities to capitalize upon market 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 volatility by investing in issuers whose debt was temporarily priced well below what I thought was warranted. The most notable of these opportunities came in the energy industry. I typically underweight this area, because I don't like the combination of high financial leverage combined with exposure to commodity-price volatility that many energy issuers have, especially exploration and production companies. However, in the first half of 2017, as the per-barrel price of oil dropped to the low $40s, I thought the risk/reward tradeoff was starting to make good sense for a number of issuers, whose bond prices were not accurately capturing what I saw as the companies' good long-term asset values. Thus, as I added aggressively to the fund's position in energy, the fund moved from a previously large underweighting in the industry to an overweighting by November This move proved well-timed. As I was building this larger energy position, the price of oil was rising, as global inventories started to shrink amid healthy demand for the commodity. Bonds of many energy issuers regained some of their lost value, boosting the fund's relative result. More recently, as the price of oil has risen dramatically lifting bond valuations along with it the risk/reward tradeoff among many of the issuers I had favored began to look less favorable to me. So, I again reduced the fund's exposure to energy, finishing the fund's fiscal year at slightly less than that of the benchmark. Other, less-pronounced investment themes this period included reducing exposure to issuers in the telecommunications industry, which we believe is maturing and features increased risk for several incumbent wireline carriers. I also added a bit more cash, which, among other benefits, provided the fund with some more capital to reinvest should attractive opportunities emerge in a morevolatile market. Q: How else did your portfolio positioning change the past 12 months Following my bottom-up approach, the fund's exposure to the B credit tier of the market grew from about 45% to 49% of the fund. I regularly overweight this area of the market, as my approach emphasizes the simultaneous monitoring of interest rate risk and credit risk. High-yield bonds with higher credit ratings tend to be more sensitive to changes in interest rates, experiencing more volatility because of their typically lower yields. Conversely, lower-rated issues generally are less affected by movement in rates, although this area of the market has more credit risk and can suffer disproportionately, should an issuer's financial position weaken. This helps to explain why I like B-rated bonds. They are in the middle of the quality spectrum and, in my opinion, provide a reasonable balance between interest rate risk and credit risk. Later, I'll have a bit more to say about how I handled the fund's exposure to rising interest rates. Q: Which investments notably influenced performance versus the benchmark Our top individual relative contributor was Bi-Lo, a supermarket operator that made very good progress in its financial restructuring and also reported better-thanexpected financial results. In March, Bi-Lo announced it had filed for bankruptcy protection, and, as part of the agreement, some of our debt was to be converted to equity in the company. Another troubled grocery store operator, however, Tops, did not fare well and hurt our relative result. We ultimately sold our position in Tops, anticipating a painful restructuring process for the firm. Another strong-performing holding was Dynegy, whose bonds rose after the company agreed last October to be acquired by Vistra Energy. The transaction ultimately closed in April. As I mentioned, bond selection was strong in the energy industry, led by California Resources Group, Denbury and Frac Tech, all of which benefited from a rising oil price. In contrast, our biggest individual detractor was Community Health Systems, a highly levered hospital provider that continued to experience margin declines, as well as a drop in patient admissions. Of final note, relative performance was hurt by an underweighting in Intelsat, a satellite provider that benefited from investors' increased optimism about the company's financial prospects, even as we continued to see a challenging risk/reward environment for the firm and remained underweight in the name at period end. Q: What's your outlook as of April 30, Fred I think the fund is reasonably well-positioned for the current economic environment. Even though valuations are no longer particularly cheap, credit spreads remain decent, with the market yielding roughly double the yield of 10-year U.S. Treasuries. We're keeping close watch for any signs of an economic slowdown, but aren't yet seeing concerning data on this front. Even as rising rates are worth monitoring, I'm generally optimistic about the medium-term prospects for the credit quality of high-yield issuers. 3 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

4 LARGEST HOLDINGS BY ISSUER Fred Hoff on how he's managing interest rate risk: "These days, the market is very focused on interest rate risk, given concern about inflation and the U.S. Federal Reserve's continued program of short-term rate hikes. Rising rates is always a concern for bonds, but I'd note that rates and inflation expectations are higher due to increased economic activity a good thing for issuer credit quality. Investors' main fear seems to be that the Fed could overshoot and raise rates too high, ultimately triggering recession. I don't see any immediate signs of that happening. "In the meantime, I've taken a few steps to help insulate the fund from the effects of rising interest rates. First, I've managed the fund's duration its sensitivity to interest rates by adding shorter-term bonds and increasing cash in the portfolio. "Second, at period end, the fund included a roughly 5% stake in floating-rate bank loans. These securities lack sensitivity to interest rates because their coupon income regularly resets along with rate changes. "Third, I've maintained a higher-than-normal allocation to commodity-oriented industries, such as energy, metals/mining and chemicals, all of which tend to benefit from higher inflation. "Although we like to limit interest rate risk in the portfolio, we do tend to be relatively comfortable taking on credit risk. This preference often entails underweighting the highest tier of the high-yield market which tends to feature lower coupons and more interest rate sensitivity and relying on our research capabilities to find fundamentally strong high-yield issuers with what we believe are good long-term prospects." Issuer CHS/CMNTY HEALTH SYSTEMS INC ALTICE S.A. FIRST QUANTUM MINERALS LTD CCO HLDGS LLC/CAP CORP HERTZ CORP Five Largest Issuers as a % of Net Assets 9.61% Total Number of Holdings 541 The five largest issuers are as of the end of the reporting period, and may not be representative of the fund's current or future investments. Holdings do not include money market investments. 10 LARGEST HOLDINGS Holding Ortho-Clinical Diagnostics, Inc % 5/15/22 Hertz Corp. 5.5% 10/15/24 Altice SA 7.75% 5/15/22 Community Health Systems, Inc % 2/1/22 Dynegy, Inc % 11/1/24 Altice SA 7.625% 2/15/25 InterGen NV 7% 6/30/23 BI-LO LLC/BI-LO Finance Corp. 9.25% 2/15/19 Ally Financial, Inc. 5.75% 11/20/25 Community Health Systems, Inc % 8/1/21 10 Largest Holdings as a % of Net Assets Market Segment Healthcare Services Cable/Satellite TV Healthcare Utilities Cable/Satellite TV Utilities Food & Drug Retail Banks & Thrifts Healthcare 10.19% Total Number of Holdings 541 The 10 largest holdings are as of the end of the reporting period, and may not be representative of the fund's current or future investments. Holdings do not include money market investments. 4 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

5 MARKET-SEGMENT DIVERSIFICATION Market Segment Portfolio Weight Portfolio Weight Six Months Ago Energy 13.58% 12.95% Health Care 12.25% 11.61% Telecommunications 6.87% 8.55% Cable TV 6.42% 5.37% Electric Utilities 5.07% 4.28% Services 4.17% 3.03% Chemicals 4.16% 3.66% Metals/Mining 3.80% 2.54% Diversified Financial Services 3.26% 3.13% Food/Beverage/Tobacco 3.01% 3.77% Banks & Thrifts 2.88% 4.90% Food & Drug Retail 2.29% 1.98% Environmental 2.20% 1.87% Homebuilding/Real Estate 2.11% 2.22% Gaming 2.07% 2.20% Entertainment/Film 1.71% 1.01% Containers 1.58% 1.18% Broadcasting 1.55% 1.08% Technology 1.51% 2.35% Shipping 1.46% 1.96% Diversified Media 1.25% 1.83% Leisure 1.17% -- Hotels 1.02% -- CREDIT-QUALITY DIVERSIFICATION Credit Quality Portfolio Weight Portfolio Weight Six Months Ago BBB & Above 0.25% 0.20% BB 26.57% 28.32% B 49.23% 44.74% CCC & Below 13.48% 13.17% Not Rated/Not Available 1.82% 1.84% Cash & Net Other Assets 8.65% 11.73% Net Other Assets can include fund receivables, fund payables, and offsets to other derivative positions, as well as certain assets that do not fall into any of the portfolio composition categories. Depending on the extent to which the fund invests in derivatives and the number of positions that are held for future settlement, Net Other Assets can be a negative number. Credit ratings for a rated issuer or security are categorized using Moody's Investors Service (Moody's). If Moody's does not publish a rating for a security or issuer, then the Standard & Poor's Ratings Services (S&P) rating is used. When S&P and Moody's provide different ratings for the same issuer or security, the Moody's rating is used. Securities that are not rated by these NRSROs (e.g. equity securities) are categorized as Not Rated. All U.S. government securities are included in the U.S. Government category. The table information is based on the combined investments of the fund and its pro-rata share of any investments in other Fidelity funds. ASSET ALLOCATION Asset Class Portfolio Weight Portfolio Weight Six Months Ago Bank Debt 5.26% 5.49% Corporate Bond: Cash Pay 84.02% 81.24% Corporate Bond: Deferred Pay 0.00% 0.00% Other Debt 0.00% 0.00% Convertible Bonds 0.66% 0.26% Convertible Preferred Stock 0.77% 0.65% Non-Convertible Preferred Stock 0.57% 0.52% Equities 0.08% 0.11% Cash & Net Other Assets 8.64% 11.73% Net Other Assets can include fund receivables, fund payables, and offsets to other derivative positions, as well as certain assets that do not fall into any of the portfolio composition categories. Depending on the extent to which the fund invests in derivatives and the number of positions that are held for future settlement, Net Other Assets can be a negative number. 5 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

6 FISCAL PERFORMANCE SUMMARY: Periods ending April 30, Month Cumulative YTD 1 3 Annualized 5 10 / LOF 1 Fidelity High Income Fund Gross Expense Ratio: 0.72% % 0.24% 4.27% 4.92% 4.35% 7.05% ICE BofAML US High Yield/US High Yield Constrained Blend -0.23% -0.25% 3.22% 5.01% 4.77% 7.83% Morningstar Fund High Yield Bond -0.34% -0.50% 2.63% 3.61% 3.57% 6.32% % Rank in Morningstar Category (1% = Best) % 15% 24% 24% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 08/29/ This expense ratio is from the prospectus in effect as of the date shown above and generally is based on amounts incurred during that fiscal year. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate; therefore, you may have a gain or loss when you sell your shares. Current performance may be higher or lower than the performance stated. Performance shown is that of the fund's Retail Class shares (if multiclass). You may own another share class of the fund with a different expense structure and, thus, have different returns. To learn more or to obtain the most recent month-end or other share-class performance, visit fidelity.com/performance, institutional.fidelity.com, or 401k.com. Total returns are historical and include change in share value and reinvestment of dividends and capital gains, if any. Cumulative total returns are reported as of the period indicated. Please see the last page(s) of this Q&A document for most-recent calendarquarter performance. DIVIDENDS AND YIELD: Fiscal Periods ending April 30, 2018 Past One Month Past Six Months Past One 30-Day SEC Yield 5.54% Day SEC Restated Yield Average Share Price $8.85 $8.93 $8.95 Dividends Per Share Fiscal period represents the fund's semiannual or annual review period. 6 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

7 Definitions and Important Information Unless otherwise disclosed to you, in providing this information, Fidelity is not undertaking to provide impartial investment advice, act as an impartial adviser, or to give advice in a fiduciary capacity. DIVIDENDS AND YIELD 30-Day SEC Restated Yield is the fund's 30-day yield without applicable waivers or reimbursements, stated as of month-end. 30-day SEC Yield is a standard yield calculation developed by the Securities and Exchange Commission for bond funds. The yield is calculated by dividing the net investment income per share earned during the 30-day period by the maximum offering price per share on the last day of the period. The yield figure reflects the dividends and interest earned during the 30-day period, after the deduction of the fund's expenses. It is sometimes referred to as "SEC 30-Day Yield" or "standardized yield". Dividends per share show the income paid by the fund for a set period of time. If you annualize this number, you can compare the fund's income over different periods. FUND RISKS The fund's yield and share price change daily and are based on changes in interest rates and market conditions, and in response to other economic, political, or financial developments. Foreign markets, particularly emerging markets can be more volatile than the U.S. market due to increased risks of adverse issuer, political, regulatory, market, or economic developments and can perform differently from the U.S. market. In general, bond prices rise when interest rates fall, and vice versa. This effect is usually more pronounced for longer-term securities. The fund may invest in lower-quality debt securities which generally offer higher yields, and carry more risk. You may have a gain or loss when you sell your shares. ICE BofAML US High Yield Master II Index. MARKET-SEGMENT WEIGHTS Market-segment weights illustrate examples of sectors or industries in which the fund may invest, and may not be representative of the fund's current or future investments. Should not be construed or used as a recommendation for any sector or industry. RANKING INFORMATION 2018 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or redistributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Fidelity does not review the Morningstar data and, for mutual fund performance, you should check the fund's current prospectus for the most up-to-date information concerning applicable loads, fees and expenses. % Rank in Morningstar Category is the fund's total-return percentile rank relative to all funds that have the same Morningstar Category. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100. The top-performing fund in a category will always receive a rank of 1%. % Rank in Morningstar Category is based on total returns which include reinvested dividends and capital gains, if any, and exclude sales charges. Multiple share classes of a fund have a common portfolio but impose different expense structures. IMPORTANT FUND INFORMATION Relative positioning data presented in this commentary is based on the fund's primary benchmark (index) unless a secondary benchmark is provided to assess performance. Effective 12/18/17, the fund's redemption fee has been removed. INDICES It is not possible to invest directly in an index. All indices represented are unmanaged. All indices include reinvestment of dividends and interest income unless otherwise noted. ICE BofAML US High Yield/U.S. High Yield Constrained Blend is a modified market capitalization weighted index of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody's, S&P and Fitch). The country of risk of qualifying issuers must be an FX-G10 member, a Western European nation, or a territory of the US or a Western European nation. In addition, qualifying securities must have at least one year remaining to final maturity, a fixed coupon schedule and at least $100 million in outstanding face value. Defaulted securities are excluded. The index contains all securities of The ICE BofAML US High Yield Index but caps issuer exposure at 2%. Index returns shown for periods prior to January 1, 2006 are returns of The 7

8 Manager Facts Fred Hoff is a portfolio manager at Fidelity Management & Research Company (FMRCo), the investment advisor for Fidelity's family of mutual funds. Fidelity Investments is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and other financial products and services to more than 20 million individuals, institutions and financial intermediaries. In this role, he manages Fidelity High Income Fund (since 2000), Fidelity High Income Central Fund 2 (since 2008), Fidelity Series High Income Fund (since 2011), the high-yield sleeves of Fidelity Balanced Fund (since 2003), Fidelity Advisor Balanced Fund (since 2003) and VIP Balanced Portfolio (1996), as well as various institutional portfolios. Prior to assuming his current responsibilities, Mr. Hoff managed the high-yield portions of the Fidelity Asset Manager funds and several high-yield portfolios available exclusively to Canadian and Japanese investors from 1996 to Previously, he served as a portfolio assistant on Fidelity Capital & Income Fund from 1993 to 1996 and a high-yield analyst following the aerospace and defense, general industrial and automotive industries from 1991 to Before joining Fidelity in 1991, he was a credit analyst for Bankers Trust Company in New York from 1988 to 1989 and a corporate loan officer for Chemical Bank in New York from 1986 to He has been in the investments industry since Mr. Hoff earned his bachelor of arts degree in economics from Lafayette College and his master of business administration degree in finance and international business from Columbia University. 8 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

9 PERFORMANCE SUMMARY: Quarter ending March 31, Annualized 5 10 / LOF 1 Fidelity High Income Fund Gross Expense Ratio: 0.72% % 5.08% 4.55% 7.42% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 08/29/ This expense ratio is from the prospectus in effect as of the date shown above and generally is based on amounts incurred during that fiscal year. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate; therefore, you may have a gain or loss when you sell your shares. Current performance may be higher or lower than the performance stated. Performance shown is that of the fund's Retail Class shares (if multiclass). You may own another share class of the fund with a different expense structure and, thus, have different returns. To learn more or to obtain the most recent month-end or other share-class performance, visit fidelity.com/performance, institutional.fidelity.com, or 401k.com. Total returns are historical and include change in share value and reinvestment of dividends and capital gains, if any. Cumulative total returns are reported as of the period indicated. Before investing in any mutual fund, please carefully consider the investment objectives, risks, charges, and expenses. For this and other information, call or write Fidelity for a free prospectus or, if available, a summary prospectus. Read it carefully before you invest. Past performance is no guarantee of future results. Views expressed are through the end of the period stated and do not necessarily represent the views of Fidelity. Views are subject to change at any time based upon market or other conditions and Fidelity disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Fidelity fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity fund. The securities mentioned are not necessarily holdings invested in by the portfolio manager(s) or FMR LLC. References to specific company securities should not be construed as recommendations or investment advice. Information included on this page is as of the most recent calendar quarter. S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC. Other third-party marks appearing herein are the property of their respective owners. All other marks appearing herein are registered or unregistered trademarks or service marks of FMR LLC or an affiliated company. Fidelity Brokerage Services LLC, Member NYSE, SIPC., 900 Salem Street, Smithfield, RI Fidelity Investments Institutional Services Company, Inc., 500 Salem Street, Smithfield, RI FMR LLC. All rights reserved. Not NCUA or NCUSIF insured. May lose value. No credit union guarantee Diversification does not ensure a profit or guarantee against a loss.